Ebook Microeconomics principles, problems, and policies (19th edition): Part 2

(BQ) Part 2 book Microeconomics principles, problems, and policies has contents: Wage determination, the demand for resources, income inequality, poverty, and discrimination, health care, international trade, agriculture - economics and policy,...and other contents.

09/09/10 9:45 PM user-f501 207/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: Bonus Web Chapter mcc11447_ch11_216-246.indd Page 246 WEB Explain how entrepreneurs and other innovators further technological advance www.mcconnell19e.com 11 AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO: Differentiate between an invention, an innovation, and technological diffusion Summarize how a firm determines its optimal amount of research and development (R&D) Relate why firms can benefit from their innovation even though rivals have an incentive to imitate it Discuss the role of market structure in promoting technological advance Show how technological advance enhances productive efficiency and allocative efficiency Technology, R&D, and Efficiency Web Chapter 11 is a bonus chapter found at the book’s Web site, www.mcconnell19e.com It extends the analysis of Part 3, “Microeconomics of Product Markets,” by examining such topics as invention, innovation, R&D decision making, and creative destruction Your instructor may (or may not) assign all or part of this chapter 246 7/19/10 4:16 PM user-f497 /Volumes/105/PHS00142/work/indd PART FOUR mcc11447_ch12_247-265.indd Page 247 12 THE DEMAND FOR RESOURCES 13 WAGE DETERMINATION 14 RENT, INTEREST, AND PROFIT 15 NATURAL RESOURCE AND ENERGY ECONOMICS MICROECONOMICS OF RESOURCE MARKETS mcc11447_ch12_247-265.indd Page 248 7/19/10 4:16 PM user-f497 /Volumes/105/PHS00142/work/indd AFTER READING THIS CHAPTER, YOU SHOULD BE 12 ABLE TO: Explain the significance of resource pricing Convey how the marginal revenue productivity of a resource relates to a firm’s demand for that resource List the factors that increase or decrease resource demand Discuss the determinants of elasticity of resource demand Determine how a competitive firm selects its optimal combination of resources The Demand for Resources When you finish your education, you probably will be looking for a new job But why would someone want to hire you? The answer, of course, is that you have a lot to offer Employers have a demand for educated, productive workers like you We need to learn more about the demand for labor and other resources So, we now turn from the pricing and production of goods and services to the pricing and employment of resources Although firms come in various sizes and operate under highly different market conditions, each has a demand for productive resources Firms obtain needed resources from households—the direct or indirect owners of land, labor, capital, and entrepreneurial resources So, referring to the circular flow model (Figure 2.2, page 40), we shift our attention from the bottom loop of the diagram (where businesses supply products that households demand) to the top loop (where businesses demand resources that households supply) This chapter looks at the demand for economic resources Although the discussion is couched in terms of labor, the principles developed also apply to land, capital, and entrepreneurial ability In 248 mcc11447_ch12_247-265.indd Page 249 7/19/10 4:17 PM user-f497 /Volumes/105/PHS00142/work/indd Chapter 13 we will combine resource (labor) demand with labor supply to analyze wage rates In Chapter 14 we will use resource demand and resource supply to examine the prices of, and returns to, other productive resources Issues relating to the use of natural resources are the subject of Chapter 15 Significance of Resource Pricing Studying resource pricing is important for several reasons: • Money-income determination Resource prices are a major factor in determining the income of households The expenditures that firms make in acquiring economic resources flow as wage, rent, interest, and profit incomes to the households that supply those resources • Cost minimization To the firm, resource prices are costs And to obtain the greatest profit, the firm must produce the profit-maximizing output with the most efficient (least costly) combination of resources Resource prices play the main role in determining the quantities of land, labor, capital, and entrepreneurial ability that will be combined in producing each good or service (see Table 2.1, p 36) • Resource allocation Just as product prices allocate finished goods and services to consumers, resource prices allocate resources among industries and firms In a dynamic economy, where technology and product demand often change, the efficient allocation of resources over time calls for the continuing shift of resources from one use to another Resource pricing is a major factor in producing those shifts • Policy issues Many policy issues surround the resource market Examples: To what extent should government redistribute income through taxes and transfers? Should government anything to discourage “excess” pay to corporate executives? Should it increase the legal minimum wage? Is the provision of subsidies to farmers efficient? Should government encourage or restrict labor unions? The facts and debates relating to these policy questions are grounded on resource pricing Marginal Productivity Theory of Resource Demand In discussing resource demand, we will first assume that a firm sells its output in a purely competitive product market and hires a certain resource in a purely competitive resource market This assumption keeps things simple and is consistent with the model of a competitive labor market that we will develop in Chapter 13 In a competitive product market, the firm is a “price taker” and can dispose of as little or as much output as it chooses at the market price The firm is selling such a negligible fraction of total output that its output decisions exert no influence on product price Similarly, the firm also is a “price taker” (or “wage taker”) in the competitive resource market It purchases such a negligible fraction of the total supply of the resource that its buying (or hiring) decisions not influence the resource price Resource Demand as a Derived Demand Resource demand is the starting point for any discussion of resource prices Resource demand is a schedule or a curve showing the amounts of a resource that buyers are willing and able to purchase at various prices over some period of time Crucially, resource demand is a derived demand, meaning that the demand for a resource is derived from the demand for the products that the resource helps to produce This is true because resources usually not directly satisfy customer wants but so indirectly through their use in producing goods and services Almost nobody wants to consume an acre of land, a John Deere tractor, or the labor services of a farmer, but millions of households want to consume the food and fiber products that these resources help produce Similarly, the demand for airplanes generates a demand for assemblers, and the demands for such services as income-tax preparation, haircuts, and child care create derived demands for accountants, barbers, and child care workers Marginal Revenue Product Because resource demand is derived from product demand, the strength of the demand for any resource will depend on: • The productivity of the resource in helping to create a good or service • The market value or price of the good or service it helps produce Other things equal, a resource that is highly productive in turning out a highly valued commodity will be in great demand On the other hand, a relatively unproductive resource that is capable of producing only a minimally valued commodity will be in little demand And no demand whatsoever will exist for a resource that is phenomenally efficient in producing something that no one wants to buy Productivity Table 12.1 shows the roles of resource productivity and product price in determining resource 249 mcc11447_ch12_247-265.indd Page 250 250 12/09/10 7:21 AM user-f501 207/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: PART FOUR Microeconomics of Resource Markets TABLE 12.1 The Demand for Labor: Pure Competition in the Sale of the Product (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) ]——————–––—– 7 ]——————–––—– 13 ]——————–––—– 18 ]——————–––—– 22 ]——————–––—– 25 ]——————–––—– 27 ]——————–––—– 28 demand Here we assume that a firm adds a single variable resource, labor, to its fixed plant Columns and give the number of units of the resource applied to production and the resulting total product (output) Column provides the marginal product (MP), or additional output, resulting from using each additional unit of labor Columns through remind us that the law of diminishing returns applies here, causing the marginal product of labor to fall beyond some point For simplicity, we assume that these diminishing marginal returns—these declines in marginal product—begin with the first worker hired Product Price But the derived demand for a resource depends also on the price of the product it produces Column in Table 12.1 adds this price information Product price is constant, in this case at $2, because the product market is competitive The firm is a price taker and can sell units of output only at this market price Multiplying column by column provides the totalrevenue data of column These are the amounts of revenue the firm realizes from the various levels of resource usage From these total-revenue data we can compute marginal revenue product (MRP)—the change in total revenue resulting from the use of each additional unit of a resource (labor, in this case) In equation form, Marginal change in total revenue revenue unit change in resource quantity product The MRPs are listed in column in Table 12.1 Rule for Employing Resources: MRP MRC The MRP schedule, shown as columns and 6, is the firm’s demand schedule for labor To understand why, you must first know the rule that guides a profit-seeking firm in hiring (4) Product Price $2 2 2 2 (5) Total Revenue, (2) (4) (6) Marginal Revenue Product (MRP) $ ]—————––––––—–$14 14 ]————––—––––—– 12 26 ]——––———––––—– 10 36 ]—————––––––—– 44 ]———––——––––—– 50 ]————––—––––—– 54 ]————––—––––—– 56 any resource: To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm’s total revenue than it adds to the firm’s total cost Economists use special terms to designate what each additional unit of labor or other variable resource adds to total cost and what it adds to total revenue We have seen that MRP measures how much each successive unit of a resource adds to total revenue The amount that each additional unit of a resource adds to the firm’s total (resource) cost is called its marginal resource cost (MRC) In equation form, Marginal change in total (resource) cost resource unit change in resource quantity cost So we can restate our rule for hiring resources as follows: It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP is equal to its MRC For example, as the rule applies to labor, if the number of workers a firm is currently hiring is such that the MRP of the last worker exceeds his or her MRC, the firm can profit by hiring more workers But if the number being hired is such that the MRC of the last worker exceeds his or her MRP, the firm is hiring workers who are not “paying their way” and it can increase its profit by discharging some workers You may have recognized that this MRP MRC rule is similar to the MR MC profit-maximizing rule employed throughout our discussion of price and output determination The rationale of the two rules is the same, but the point of reference is now inputs of a resource, not outputs of a product MRP as Resource Demand Schedule Let’s continue with our focus on labor, knowing that the analysis also applies to other resources In a purely mcc11447_ch12_247-265.indd Page 251 12/09/10 7:21 AM user-f501 207/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: CHAPTER 12 251 The Demand for Resources Resource Demand under Imperfect Product Market Competition Resource demand (here, labor demand) is more complex when the firm is selling its product in an imperfectly competitive market, one in which the firm is a price maker That is because imperfect competitors (pure monopolists, 1Note that we plot the points in Figure 12.1 halfway between succeeding numbers of resource units because MRP is associated with the addition of more unit Thus in Figure 12.1, for example, we plot the MRP of the second unit ($12) not at or but at 112 This “smoothing” enables us to sketch a continuously downsloping curve rather than one that moves downward in discrete steps (like a staircase) as each new unit of labor is hired FIGURE 12.1 The purely competitive seller’s demand for a resource The MRP curve is the resource demand curve; each of its points relates a particular resource price (5 MRP when profit is maximized) with a corresponding quantity of the resource demanded Under pure competition, product price is constant; therefore, the downward slope of the D MRP curve is due solely to the decline in the resource’s marginal product (law of diminishing marginal returns) P Resource price (wage rate) competitive labor market, market supply and market demand establish the wage rate Because each firm hires such a small fraction of market supply, it cannot influence the market wage rate; it is a wage taker, not a wage maker This means that for each additional unit of labor hired, each firm’s total resource cost increases by exactly the amount of the constant market wage rate More specifically, the MRC of labor exactly equals the market wage rate Thus, resource “price” (the market wage rate) and resource “cost” (marginal resource cost) are equal for a firm that hires a resource in a competitive labor market As a result, the MRP MRC rule tells us that, in pure competition, the firm will hire workers up to the point at which the market wage rate (its MRC) is equal to its MRP In terms of the data in columns and of Table 12.1, if the market wage rate is, say, $13.95, the firm will hire only one worker This is so because only the hiring of the first worker results in an increase in profits To see this, note that for the first worker MRP (5 $14) exceeds MRC (5 $13.95) Thus, hiring the first worker is profitable For each successive worker, however, MRC (5 $13.95) exceeds MRP (5 $12 or less), indicating that it will not be profitable to hire any of those workers If the wage rate is $11.95, by the same reasoning we discover that it will pay the firm to hire both the first and second workers Similarly, if the wage rate is $9.95, three workers will be hired If it is $7.95, four If it is $5.95, five And so forth So here is the key generalization: The MRP schedule constitutes the firm’s demand for labor because each point on this schedule (or curve) indicates the number of workers the firm would hire at each possible wage rate In Figure 12.1, we show the D MRP curve based on the data in Table 12.1.1 The competitive firm’s resource demand curve identifies an inverse relationship between the wage rate and the quantity of labor demanded, other things equal The curve slopes downward because of diminishing marginal returns $14 12 10 D = MRP Quantity of resource demanded Q oligopolists, and monopolistic competitors) face downsloping product demand curves As a result, whenever an imperfect competitor’s product demand curve is fixed in place, the only way to increase sales is by setting a lower price (and thereby moving down along the fixed demand curve) The productivity data in Table 12.1 are retained in columns to in Table 12.2 But here in Table 12.2 we show in column that product price must be lowered to sell the marginal product of each successive worker The MRP of the purely competitive seller of Table 12.1 falls for only one reason: Marginal product diminishes But the MRP of the imperfectly competitive seller of Table 12.2 falls for two reasons: Marginal product diminishes and product price falls as output increases We emphasize that the lower price accompanying each increase in output (total product) applies not only to the marginal product of each successive worker but also to all prior output units that otherwise could have been sold at a higher price Observe that the marginal product of the second worker is units of output These units can be sold for $2.40 each, or, as a group, for $14.40 But $14.40 is not the MRP of the second worker To sell these units, the firm must take a 20-cent price cut on the units produced by the first worker—units that otherwise could have been sold for $2.60 each Thus, the MRP of the second worker is only $13 [5 $14.40 (7 20 cents)], as shown Similarly, the third worker adds units to total product, and these units are worth $2.20 each, or $11 total But to sell these units, the firm must take a 20-cent price cut on the 13 units produced by the first two workers So the mcc11447_ch12_247-265.indd Page 252 7:21 AM user-f501 207/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: PART FOUR Microeconomics of Resource Markets TABLE 12.2 The Demand for Labor: Imperfect Competition in the Sale of the Product (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) ]——————–––—– 7 ]——————–––—– 13 ]——————–––—– 18 ]——————–––—– 22 ]——————–––—– 25 ]——————–––—– 27 ]——————–––—– 28 FIGURE 12.2 The imperfectly competitive seller’s demand curve for a resource An imperfectly competitive seller’s resource demand curve D (solid) slopes downward because both marginal product and product price fall as resource employment and output rise This downward slope is greater than that for a purely competitive seller (dashed resource demand curve) because the pure competitor can sell the added output at a constant price P $18 16 14 12 D = MRP (imperfect competition) –2 Quantity of resource demanded (5) Total Revenue, (2) (4) (6) Marginal Revenue Product (MRP) $ ]—————–––—– $18.20 18.20 ]————–––––—– 13.00 31.20 ]————–––––—– 8.40 39.60 ]————–––––—– 4.40 44.00 ]———––—–––—– 2.25 46.25 ]————–––––—– 1.00 47.25 ]————–––––—– 21.05 46.20 curves reveals that the imperfectly competitive seller (solid curve) does not expand the quantity of labor it employs by as large a percentage as does the purely competitive seller (broken curve) It is not surprising that the imperfectly competitive producer is less responsive to resource price cuts than the purely competitive proWORKED PROBLEMS ducer When resource W 12.1 prices fall, MC per unit declines for both imperResource demand fectly competitive firms as well as purely competitive firms Because both types of firms maximize profits by producing where MR MC, the decline in MC will cause both types of firms to produce more But the effect will be muted for imperfectly competitive firms because their downsloping demand curves cause them to also face downsloping MR curves— so that for each additional unit sold, MR declines By contrast, MR is constant (and equal to the market equilibrium price P) for competitive firms, so that they not have to worry about MR per unit falling as they produce more units As a result, competitive firms increase production by a larger amount than imperfectly competitive firms whenever resource prices fall Market Demand for a Resource D = MRP (pure competition) 10 (4) Product Price $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 third worker’s MRP is only $8.40 [5 $11 (13 20 cents)] The numbers in column reflect such calculations In Figure 12.2 we graph the MRP data from Table 12.2 and label it “D MRP (imperfect competition).” The broken-line resource demand curve, in contrast, is that of the purely competitive seller represented in Figure 12.1 A comparison of the two curves demonstrates that, other things equal, the resource demand curve of an imperfectly competitive seller is less elastic than that of a purely competitive seller Consider the effects of an identical percentage decline in the wage rate (resource price) from $11 to $6 in Figure 12.2 Comparison of the two Resource price (wage rate) 252 12/09/10 Q The total, or market, demand curve for a specific resource shows the various total amounts of the resource that firms will purchase or hire at various resource prices, other things equal Recall that the total, or market, demand curve for a product is found by summing horizontally the demand curves of all individual buyers in the market The market demand curve for a particular resource is derived in essentially the same way—by summing horizontally the individual demand or MRP curves for all firms hiring that resource mcc11447_ch12_247-265.indd Page 253 12/09/10 7:21 AM user-f501 207/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: CHAPTER 12 253 The Demand for Resources QUICK REVIEW 12.1 • To maximize profit, a firm will purchase or hire a resource in an amount at which the resource’s marginal revenue product equals its marginal resource cost (MRP MRC) • Application of the MRP MRC rule to a firm’s MRP curve demonstrates that the MRP curve is the firm’s resource demand curve In a purely competitive resource market, resource price (the wage rate) equals MRC • The resource demand curve of a purely competitive seller is downsloping solely because the marginal product of the resource diminishes; the resource demand curve of an imperfectly competitive seller is downsloping because marginal product diminishes and product price falls as output is increased CONSIDER THIS Superstars In what economist Robert Frank calls “winner-take-all markets,” a few highly talented performers have huge earnings relative to the average performers in the market Because consumers and firms seek out “top” performers, small differences in talent or popularity get magnified into huge differences in pay In these markets, consumer spending gets channeled toward a few performers The media then “hypes” these individuals, which further increases the public’s awareness of their talents Many more consumers then buy the stars’ products Although it is not easy to stay on top, several superstars emerge The high earnings of superstars result from the high revenues they generate from their work Consider Beyoncé Knowles If she sold only a few thousand songs and attracted only a few hundred fans to each concert, the revenue she would produce—her marginal revenue product—would be quite modest So, too, would be her earnings But consumers have anointed Beyoncé as queen of the R&B and hip-hop portion of pop culture The demand for her music and concerts is extraordinarily high She sells millions of songs, not thousands, and draws thousands to her concerts, not hundreds Her extraordinarily high net earnings derive from her extraordinarily high MRP So it is for the other superstars in the “winner-take-all markets.” Influenced by the media, but coerced by no one, consumers direct their spending toward a select few The resulting strong demand for these stars’ services reflects their high MRP And because top talent (by definition) is very limited, superstars receive amazingly high earnings Determinants of Resource Demand What will alter the demand for a resource—that is, shift the resource demand curve? The fact that resource demand is derived from product demand and depends on resource productivity suggests two “resource demand shifters.” Also, our analysis of how changes in the prices of other products can shift a product’s demand curve (Chapter 3) suggests another factor: changes in the prices of other resources Changes in Product Demand Other things equal, an increase in the demand for a product will increase the demand for a resource used in its production, whereas a decrease in product demand will decrease the demand for that resource Let’s see how this works The first thing to recall is that a change in the demand for a product will change its price In Table 12.1, let’s assume that an increase in product demand boosts product price from $2 to $3 You should calculate the new resource demand schedule (columns and 6) that would result and plot it in Figure 12.1 to verify that the new resource demand curve lies to the right of the old demand curve Similarly, a decline in the product demand (and price) will shift the resource demand curve to the left This effect—resource demand changing along with product demand—demonstrates that resource demand is derived from product demand Example: Assuming no offsetting change in supply, a decrease in the demand for new houses will drive down house prices Those lower prices will decrease the MRP of construction workers, and therefore the demand for construction workers will fall The resource demand curve such as in Figure 12.1 or Figure 12.2 will shift to the left Changes in Productivity Other things equal, an increase in the productivity of a resource will increase the demand for the resource and a decrease in productivity will reduce the demand for the resource If we doubled the MP data of column in Table 12.1, the MRP data of column would also double, indicating a rightward shift of the resource demand curve The productivity of any resource may be altered over the long run in several ways: • Quantities of other resources The marginal productivity of any resource will vary with the quantities of the other resources used with it The greater the amount of capital and land resources used with, say, labor, the greater will be labor’s marginal productivity and, thus, labor demand mcc11447_ch12_247-265.indd Page 254 254 7/19/10 4:17 PM user-f497 /Volumes/105/PHS00142/work/indd PART FOUR Microeconomics of Resource Markets • Technological advance Technological improvements that increase the quality of other resources, such as capital, have the same effect The better the quality of capital, the greater the productivity of labor used with it Dockworkers employed with a specific amount of real capital in the form of unloading cranes are more productive than dockworkers with the same amount of real capital embodied in older conveyor-belt systems • Quality of the variable resource Improvements in the quality of the variable resource, such as labor, will increase its marginal productivity and therefore its demand In effect, there will be a new demand curve for a different, more skilled, kind of labor All these considerations help explain why the average level of (real) wages is higher in industrially advanced nations (for example, the United States, Germany, Japan, and France) than in developing nations (for example, Nicaragua, Ethiopia, Angola, and Cambodia) Workers in industrially advanced nations are generally healthier, better educated, and better trained than are workers in developing countries Also, in most industries they work with a larger and more efficient stock of capital goods and more abundant natural resources This increases productivity and creates a strong demand for labor On the supply side of the market, labor is scarcer relative to capital in industrially advanced than in most developing nations A strong demand and a relatively scarce supply of labor result in high wage rates in the industrially advanced nations Changes in the Prices of Other Resources Changes in the prices of other resources may change the demand for a specific resource For example, a change in the price of capital may change the demand for labor The direction of the change in labor demand will depend on whether labor and capital are substitutes or complements in production Substitute Resources Suppose the technology in a certain production process is such that labor and capital are substitutable A firm can produce some specific amount of output using a relatively small amount of labor and a relatively large amount of capital, or vice versa Now assume that the price of machinery (capital) falls The effect on the demand for labor will be the net result of two opposed effects: the substitution effect and the output effect • Substitution effect The decline in the price of machinery prompts the firm to substitute machinery for labor This allows the firm to produce its output at lower cost So at the fixed wage rate, smaller quantities of labor are now employed This substitution effect decreases the demand for labor More generally, the substitution effect indicates that a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased • Output effect Because the price of machinery has fallen, the costs of producing various outputs must also decline With lower costs, the firm finds it profitable to produce and sell a greater output The greater output increases the demand for all resources, including labor So this output effect increases the demand for labor More generally, the output effect means that the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises • Net effect The substitution and output effects are both present when the price of an input changes, but they work in opposite directions For a decline in the price of capital, the substitution effect decreases the demand for labor and the output effect increases it The net change in labor demand depends on the relative sizes of the two effects: If the substitution effect outweighs the output effect, a decrease in the price of capital decreases the demand for labor If the output effect exceeds the substitution effect, a decrease in the price of capital increases the demand for labor Complementary Resources Recall from Chapter that certain products, such as computers and software, are complementary goods; they “go together” and are jointly demanded Resources may also be complementary; an increase in the quantity of one of them used in the production process requires an increase in the amount used of the other as well, and vice versa Suppose a small design firm does computer-assisted design (CAD) with relatively expensive personal computers as its basic piece of capital equipment Each computer requires exactly one design engineer to operate it; the machine is not automated—it will not run itself—and a second engineer would have nothing to Now assume that a technological advance in the production of these computers substantially reduces their price There can be no substitution effect because labor and capital must be used in fixed proportions, one person for one machine Capital cannot be substituted for labor But there is an output effect Other things equal, the reduction in the price of capital goods means lower production costs Producing a larger output will therefore be profitable In doing so, the firm will use both more capital and more labor When labor and capital are complementary, a decline in the price of capital increases the demand for labor through the output effect We have cast our analysis of substitute resources and complementary resources mainly in terms of a decline in mcc11447_ch12_247-265.indd Page 255 30/09/10 11:34 PM user-f494 /201/MHSF216/oLs11579_disk1of1/0078111579/oLs11579_pagefiles CHAPTER 12 255 The Demand for Resources TABLE 12.3 The Effect of an Increase in the Price of Capital on the Demand for Labor, DL (2) Increase in the Price of Capital (1) Relationship of Inputs (a) Substitution Effect (b) Output Effect (c) Combined Effect Substitutes in production Labor substituted for capital Production costs up, output down, and less of both capital and labor used Complements in production No substitution of labor for capital Production costs up, output down, and less of both capital and labor used DL increases if the substitution effect exceeds the output effect; DL decreases if the output effect exceeds the substitution effect DL decreases (because only the output effect applies) the price of capital Table 12.3 summarizes the effects of an increase in the price of capital on the demand for labor Please study it carefully Now that we have discussed the full list of the determinants of labor demand, let’s again review their effects Stated in terms of the labor resource, the demand for labor will increase (the labor demand curve will shift rightward) when: • The demand for (and therefore the price of) the product produced by that labor increases • The productivity (MP) of labor increases • The price of a substitute input decreases, provided the output effect exceeds the substitution effect • The price of a substitute input increases, provided the substitution effect exceeds the output effect • The price of a complementary input decreases Be sure that you can “reverse” these effects to explain a decrease in labor demand Table 12.4 provides several illustrations of the determinants of labor demand, listed by the categories of determinants we have discussed You will benefit by giving them a close look Occupational Employment Trends Changes in labor demand have considerable significance since they affect wage rates and employment in specific occupations Increases in labor demand for certain occupational groups result in increases in their employment; decreases in labor demand result in decreases in their employment For illustration, let’s first look at occupations for which labor demand is growing and then examine occupations for which it is declining (Wage rates are the subject of the next chapter.) The Fastest-Growing Occupations Table 12.5 lists the 10 fastest-growing U.S occupations for 2008 to 2018, as measured by percentage changes and projected by the Bureau of Labor Statistics It is no coincidence that the service occupations dominate the list In general, the demand for service workers in the United States is rapidly outpacing the demand for manufacturing, construction, and mining workers Of the 10 fastest-growing occupations in percentage terms, three—personal and home care aides (people who TABLE 12.4 Determinants of Labor Demand: Factors That Shift the Labor Demand Curve Determinant Examples Change in product demand Gambling increases in popularity, increasing the demand for workers at casinos Consumers decrease their demand for leather coats, decreasing the demand for tanners The Federal government increases spending on homeland security, increasing the demand for security personnel An increase in the skill levels of physicians increases the demand for their services Computer-assisted graphic design increases the productivity of, and demand for, graphic artists An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are Change in productivity Change in the price of another resource mcc37735_ind_IND1-IND21.indd Page IND-10 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-10 Index Labor, Health and Human Services and Education Act (2008), 370 Labor demand curve changes in labor demand, 255 declining occupations, 256 fastest-growing occupations, 255–256 in monopsony model, 272 in purely competitive labor market, 269–271 wage differentials and, 278 Labor force See Unemployment Labor-intensive goods, 474 Labor market See also Labor; Labor demand curve; Labor supply curve agricultural, 397 demand for highly skilled workers, 416, 455, 456, 459 health care costs and, 437 immigration and, 454–468 offshoring of jobs, 437, 492–494 specialization of, 154 Labor supply curve in monopsony model, 272 in purely competitive labor market, 269–271 wage differentials and, 278 Labor unions, 273–275, 287–291 antitrust policy and, 375 bilateral monopoly model, 275–276 collective bargaining and, 288–290 decline of unionism, 287–288, 416–417 demand-enhancement model, 273–274 economic effects of, 289–291 exclusive/craft union model, 274 inclusive/industrial union model, 274–275 income inequality and, 416–417 membership in, 287 offsetting factors, 291 wage determination, 273–275, 287–291 wage differentials and, 280–281 wage increases and unemployment, 275 Laissez-faire capitalism, 30, 378 Land defined, 10 leasing agricultural, 396 ownership of, 295–296 quality of, 296 as resource, 10 single tax on, 296–297 Land-intensive goods, 474 Land rent alternative uses of land, 296 determination of, 294 inelastic supply of land, 294 productivity differences and rent differences, 295 rent-seeking behavior and, 367 single-tax movement, 296–297 as surplus payment, 295 Landrum-Griffin Act of 1959, 289 Language skills, in decision to migrate, 458 Large crop yields, price elasticity of demand and, 83 Latinos See Hispanics Law of demand, 49 Law of diminishing marginal utility, 117–119 defined, 49, 117 demand and, 119 marginal utility, 117–119 total utility, 117–119 utility, defined, 117 vending machines and, 117 Law of diminishing returns, 144–147 application of, 144–147 defined, 144 graphical expression of, 145–147 rationale for, 144–145 tabular example of, 145 Law of increasing opportunity costs, 12–13 economic rationale for, 13 shape of curve, 13 Law of supply, 53 Learning by doing, 33, 156, 358 Leasing land, 396 Least-cost combination of resources defined, 258 numerical illustration, 259–260 Least-cost production, 36 Legal cartel theory of regulation, 383 Legal immigrants decision to migrate, 456–458 defined, 455 family reunification and, 455–456 origins of, 456 quotas for, 455–456, 466, 467 specialty occupations and, 455, 456, 459 Legal issues forms of business See Corporations; Partnerships; Sole proprietorships immigration reform, 466 legalization of drugs, price elasticity of demand and, 83 Legislation antitrust, 88, 233, 375–376, 375–381 credit, 307 farm policy, 405–406 federal health care, 433, 434, 443, 445–446, 447–450 immigration, 466 labor market, 276 negative externalities and, 92 Lemon laws, 360 Lenovo, 346 Lettuce, market for, 69 LG, 381 Licenses as barrier to entry, 197 occupational licensing, 274, 358–359, 383 Lifestyle factors, health care costs and, 440 Limited-choice, bundled-goods problem, 367–368 Limited income, of individuals, 7–8 Limit pricing, in oligopoly, 233, 235 Linear relationship, equation of, 25 List, John, 129 Living standards, 313–314 Loaded terminology, in economic reasoning, 16 Loan(s) See also Credit demand for loanable funds, 298–299 size of, and interest rates, 298 Loanable funds theory of interest, 298–299 demand for loanable funds, 299 extending the model, 299–300 supply of loanable funds, 298–299 Local government employment in, 342–343 finances in U.S., 342 fiscal impact of immigration and, 465 Localized markets, 225 Location, product differentiation through, 217 Lockouts, 289 Logrolling, 363, 403 Long run decline of agriculture in, 395–397 defined, 85, 143 economies and diseconomies of scale and, 153–156 price and output in monopolistic competition, 221 price elasticity of supply and, 85 production costs in, 152–157 profit maximization in pure competition, 182–185 pure competition in, 181–192 real wages in, 268–269 variable plant in, 143 Long-run supply curve for constant-cost industry, 184–185 for decreasing-cost industry, 185–186 defined, 184 for increasing-cost industry, 185 L’Oreal, 224 Lorenz curve, 411, 412, 413, 417 Loss averse, 126 Loss-minimization, 171 Lotteries, income and payouts of, 342 Luck, income inequality and, 415 Luxuries necessities versus, 8, 82–83 price elasticity of demand and, 82–83 Mach, Traci L., 428n Macpherson, David A., 454n Macroeconomics See also Economic growth; Inflation; Unemployment defined, 6–7 domestic macroeconomic adjustments, 510 fixed-exchange rate systems and, 508–510 microeconomics versus, 6–7 Magnet countries, 457 Majority voting, 362–365 implications of, 363 inefficient outcomes of, 362–363 median-voter model, 364–365 paradox of, 363–364 mcc37735_ind_IND1-IND21.indd Page IND-11 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles Index IND-11 Major League Baseball immigration and, 459 monopsony power of, 273 price discrimination and, 208 as pure monopolies, 195 Make-work rules, 289 Malthus, Thomas, 313, 314 Managed care, 446–447 Managed floating exchange rates, 510–511 criticisms of, 511 defined, 510 support for, 511 Management labor unions and, 288 managerial specialization, 154–155 Marginal analysis See also Cost-benefit analysis; Marginal utility; MB MC rule; MR MC rule; P MC in competitive markets, 59 defined, economics of war and, 14 fast-food lines and, optimal allocation and, 13–14, 59, 97–98 for public goods and services, 101, 102–104 in pure monopoly, 200–202, 209, 210 slopes and, 24 Marginal cost (MC) average total cost (ATC) and, 150–151 average variable cost (AVC) and, 150–151 calculating, 149–150 defined, 149 graphical expression of, 150 law of supply and, 53 marginal decisions and, 150 marginal product and, 150, 258 marginal-revenue-marginal-cost approach to profit maximization, 167–172 in pure monopoly, 204 short-run supply and, 173–176 Marginal-cost-marginal-benefit rule, 104 Marginal product (MP) defined, 144, 250 law of diminishing returns and, 144, 147 marginal cost and, 150, 258 Marginal productivity theory of income distribution, 260–262 of resource demand, 249–253 Marginal rate of substitution (MRS), 135 Marginal resource cost (MRC) See also MRP MRC rule defined, 250 higher than wage rate, 271–272 Marginal revenue (MR) defined, 165 differences in, 295 graphical expression of, 166 marginal-revenue-marginal-cost approach to profit maximization, 167–172 in pure monopoly, 198–199, 204 Marginal revenue product (MRP), 249–251 See also MRP MRC rule defined, 250 labor demand, 290–291 market demand for a resource, 252 productivity and, 249–250 product price and, 250 as resource demand schedule, 250–251 resource demand under imperfect product market competition, 251–252 wage differentials and, 278–279 Marginal tax rate, 340–341 Marginal utility algebraic generalizations, 121–122 applications and extensions, 123–125 defined, 117 demand and, 119, 122–123 law of diminishing marginal utility, 49, 117–119 numerical examples, 120–121 total utility and, 117–119 utility-maximizing rule, 120 Marginal utility per dollar, 120 Market(s) See also Demand; Market systems; Supply defined, 32, 48 in market systems See Market systems nature of, 48 role of, 48 Market demand, 50 for labor, 269 for private goods, 99 for a resource, 252 Market demand curve, in pure monopoly, 197–200 Market equilibrium, 56–61 changes in demand and, 59–60, 69–72 changes in supply and, 59–60, 69–72 complex cases, 59–60 efficient allocation, 58–59 equilibrium price, 56–58, 175–176, 182–184, 483 equilibrium quantity, 56–58 rationing function of prices, 58 Market failure, 92–112, 361 in competitive markets, 93–99 free-rider problem, 100, 282 government involvement and, 34, 109–111 information failure, 358–361, 439 nature of efficiently functioning markets, 93–99 Market for externality rights, 110–111 advantages of, 110–111 operation of market, 110–111 Market imperfections imperfect competition, 164 marginal productivity theory of income distribution and, 261–262 resource demand and, 251–252 wage differentials and, 280–281 Marketing loan program, 406 Market period defined, 84–85 price elasticity of supply and, 84–85 Market power See also Monopoly; Oligopoly elasticity and, 86–87 income inequality and, 415 relevant market and, 377–378 Market segregation, 208 Market shares, monopolistic competition and, 217 Market supply, 54 of labor, 269 Market systems, 30–43 bureaucratic inefficiency versus, 368 characteristics of, 30–34 circular flow model and, 40–41 competition in, 31–32, 36, 58–59 defined, 30 demise of command systems and, 38–40 efficiency in, 35–36, 38 fundamental questions of, 35–38 imperfect institutions in, 369 “invisible hand” and, 38, 189, 295–296 money in, 33–34 monopolistic competition See Monopolistic competition oligopoly See Oligopoly overview of, 164 pure competition See Pure competition pure monopoly See Pure monopoly Marriott, 361 Martinez, Tracy, 224 Maturity, interest rates and, 297–298 Maximum willingness to pay, 93–94, 97–98 MB MC rule See also Cost-benefit analysis; Marginal analysis comparing MB and MC, 102 in competitive markets, 59 economics of war, 14 health care costs and, 438 optimal allocation and, 13–14, 59, 97–98 for optimal immigration, 467 for optimal level of social regulation, 385 for optimal reduction of an externality, 109 for public goods, 101, 102–104 McCain, John, 370 McConnell, Campbell R., 454n McDonald’s, 35, 224, 235 McDonnell Douglas, 379, 380 Means tests, 423 Measurement units, slopes and, 24 Median family wealth, 428 Median-voter model, 364–365 Medicaid, 423, 436, 437, 441, 449 Medical care See Health care Medicare, 437 cost containment through, 447 described, 435 health care, 422, 435, 441, 449 payroll taxes, 341, 346, 350, 351 as social insurance, 421–422 mcc37735_ind_IND1-IND21.indd Page IND-12 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-12 Index Medium of exchange, money as, 33–34 Mental accounting defined, 128 overpriced warranties and, 128 Mergers See also Antitrust policy cross elasticity of demand and, 88 guidelines for, 379–380 in oligopoly, 225, 236–237 types of, 379 Mexico cheap foreign labor argument for trade protection, 490 comparative advantage, 475–477 exports of, 512 immigration from, 456, 458–463, 466 land-intensive goods, 474 North American Free Trade Agreement (NAFTA), 492 opportunity-cost ratio, 476–477 Michelin, 207 Microeconomics defined, of government See Public choice theory; Public goods and services; Taxation macroeconomics versus, 6–7 Micron, 381 Microporous, 380 Microsoft Corporation, 9, 42, 157, 194, 205, 207, 235, 307 antitrust case, 197, 377, 378–379, 386–387 Middle East, oil cartel, 231–232, 473, 513 Midpoint formula, 76 Military self-sufficiency argument for trade protection, 488 Miller Brewing Company, 236–237, 242 Minimum efficient scale (MES), 156–157, 396–397 Minimum wage case against, 276–277 case for, 277 defined, 276 evidence and conclusions, 277 Minus sign, in price elasticity of demand, 77 Misfortune, income inequality and, 415 Mobil, 379 Mobility See also Immigration income inequality and, 412–413, 456–463 Mobil Travel Guide, 361 Molson Coors, 236–237 Monetary policy See Federal Reserve System Money See also Currency; Interest defined, 34 in market systems, 33–34 as medium of exchange, 33–34 resource pricing and, 249 time-value of money and, 300–301 value of, 297 Money supply See Bank(s) Monopolistic competition, 217–223 characteristics of, 164, 217–218 defined, 164, 217 efficiency and, 221–222 entry and exit, 218, 221 industries with, 218–219 price and output in, 219–221 product differentiation in, 217–218, 223 product variety and, 222–223 Monopolization, 375 Monopoly See also Antitrust policy; Pure monopoly antitrust policy and, 375–381 AT&T case, 378, 383 diamonds and, 212 industrial regulation in perpetuating, 382–383 Microsoft case, 197, 377, 378–379, 386–387 monopoly behavior versus monopoly structure, 377 natural, 157, 196, 207, 210, 375, 381–382 near-monopolies, 195, 375 regulated monopolies, 209–211 Monopoly demand, 197–200 marginal revenue in, 198–199, 204 monopolist as price maker, 195, 197, 199–200 output and price determination, 200–203 total-revenue test for price, 200 Monopoly power, 208 Monopsony, 271–273 defined, 271 equilibrium wage and employment, 272 examples of, 273 MRC higher than wage rate, 271–272 upsloping labor supply to firm, 271–272 Moore, Kevin B., 428n Moral hazard problem described, 359 health care insurance and, 441 Moving costs, of immigrants, 457 MP3 players, 190, 305 MR MC rule, 169–176 antitrust policy and, 375 defined, 169 demand for resources and, 258–260 in the long run, 181 marginal cost and short-run supply, 173–176 in pure monopoly, 200–202, 204, 209–210 in the short run, 167–172 still there motel and, 173 MRP MRC rule See also Marginal resource cost (MRC); Marginal revenue product (MRP) defined, 250 in employing resources, 250 for monopsony model, 271–272 for purely competitive labor market, 269–271 Multilateral trade agreements, 490–492 Multinational corporations, 207 Murphy, Kevin, 438 Mutual interdependence complications of, 228 defined, 224 in game theory, 227, 228 noncollusive oligopoly and, 228–230 in oligopoly, 224 Nash, John F., 241n Nash equilibrium, 241–244 National, 392 National Basketball Association (NBA), monopsony power of, 273 National Committee for Health and Clinical Excellence, 443 National defense See also Terrorist attacks of September 11, 2001 economics of war, 14 immigration and, 465–467 imperfect institutions and, 369 military self-sufficiency argument for trade protection and, 488 National Education Association (NEA), 274 National Football League (NFL), monopsony power of, 273 National Foundation for American Policy, 459n National health insurance (NHI), 434 National income accounting See Gross domestic product (GDP) National Labor Relations Act (NLRA), 289 National Labor Relations Board (NLRB), 289 National Safety Council, 385 Native American Arts and Crafts, 224 Natural monopoly, 157, 196, 207, 210, 375, 381–382 Natural resources, 312–332 economics of, 321–329 nonrenewable, 321, 322–325 renewable, 321, 325–329 resource supplies, 313–314 role in wage determination, 268 Near-monopolies, 195, 375 NEC, 207 Necessities luxuries versus, 8, 82–83 price elasticity of demand and, 82–83 Negative externalities, 105 correcting for, 105, 106–108 government intervention, 106–108 market-based approach to, 110–111 optimal amount of externality reduction, 108–109 of taxation, 107–108, 349–350 Negative self-selection, 463 Negative slope, 24 Negative-sum game, 241 Nestlé, 207 Net benefits, of natural resources, 321 Net costs of import quotas, 487–488 of tariffs, 487–488 Net effect, 254 Net investment income, 501 Netscape Navigator, 197, 386 Network effects, 205 New York Stock Exchange, as market, 48 mcc37735_ind_IND1-IND21.indd Page IND-13 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles Index IND-13 New York Times, 158 Nike, 242 90-10 ratio, 416 Nippon Cargo, 381 Nokia, 207, 235 Nominal interest rates, 302 Nominal wage, 267 Noncash transfers, 413 Noncollusive oligopoly, 228–230 Noncompeting groups defined, 279 wage differentials and, 279 Nonprice competition defined, 218 in monopolistic competition, 164, 218 in pure monopoly, 195 Nonrenewable natural resources, 322–325 defined, 321 incomplete property rights and excessive present use, 324–325 present use versus future use of, 322–324 Nonrivalrous consumption, 205 Nontariff barriers (NTB), 485–486 Nordhaus, William, 438 Normal goods defined, 51–52 income elasticity of demand and, 88 Normal profit break-even point and, 167 as a cost, 141–142 defined, 142 in monopolistic competition, 221 in profit rations entrepreneurship, 306 technological advance and, 189–190 Normative economics, North American Free Trade Agreement (NAFTA), 492 North Korea, command system in, 30, 39 Norwegian American Foundation, 370 Novell, 387 Number of buyers, change in demand and, 51, 52 Number of sellers change in supply and, 55–56 monopolistic competition and, 217 as obstacle to collusion, 232 in pure competition, 164 Obama, Barack, 433, 447 Occidental Petroleum, 283 Occupation(s) See also Education and training demand for highly skilled workers, 416, 455, 456, 459 occupational licensing, 274, 358–359, 383 specialty occupations of immigrants, 455, 456, 459 Occupational Safety and Health Administration (OSHA), 384 Occupational segregation, 281 crowding model, 426–429 defined, 426 economics of, 427 eliminating, 427–429 Office Depot, 380 Office of Immigration Statistics, 455n, 456n Official reserves, 502, 509 Offshoring, 437, 492–494 Oil industry cartels in, 231–232, 473, 513 daily production, 231 supply of cheap energy, 319–320 Oligopoly, 223–237 advertising and, 234 antitrust policy and, 376 cartels and, 230–233 characteristics of, 164, 223–225, 226–227 defined, 164, 223 efficiency and, 235 game theory and, 226–227 industries with, 225–226, 236–237 kinked-demand theory and, 228–230 mergers and, 225, 236–237 noncollusive, 228–230 price leadership model, 233 Olympics, preset ticket prices, 72–73 One-time game, 241 Open shop, 288 Opportunity cost(s) See also Economic costs budget line, 9–10 choice and, 10 defined, economic (pure) profit and, 142–143 explicit, 141, 304 implicit, 141, 304 law of increasing, 12–13 long run, 143 in marginal-revenue-marginal-cost approach to profit, 182–184 normal profit as cost, 142 short run, 143 in theory of consumer behavior, 124–125 Opportunity-cost ratio, 476–477 Oprah Winfrey Show, Optimal allocation, in marginal analysis, 13–14, 59, 97–98 Optimal immigration, 467 Optimal level of social regulation, 385 Optimal reduction of an externality, 109 Oracle, 283 Organisation for Economic Cooperation and Development (OECD), 339n, 351n, 436n, 457n Organization of Petroleum Exporting Countries (OPEC), 231–232, 473, 513 Organ transplants, 62–63, 444 Other-things-equal assumption (ceteris paribus) defined, in graphical expression, 23–24 Ottaviano, Gianmarco, 463n Output See also Total output in cartels, 230–231 coordination problem in command systems, 38–39 impact of immigration on, 459–460 in market systems, 36–37 in monopolistic competition, 219–221 in oligopoly, 226–237 in pure monopoly, 200–203, 204 short-run fluctuations in agricultural, 392–393 Output effect, 254 Outsourcing health care costs and, 437 offshoring, 437, 492–494 Overt collusion, 231–232 Ownership of resources, as barrier to entry, 197 Packaging product differentiation through, 217–218 size reductions, 126–127 Papa, Mark, 283 Paradox of voting, 363–364 outcomes and, 364 preferences, 363–364 Parity concept criticisms of, 402 defined, 399 purchasing power parity, 505 Parity ratio, 399 Partnerships in business population, 41 defined, 41 Part-time workers, health care costs and, 437 P ATC dilemma of regulation and, 211 as fair-return price, 210–211 in monopolistic competition, 221 in oligopoly, 235 Patents, 31, 191 as barrier to entry, 196–197, 206 Patient Protection and Affordable Care Act (PPACA), 433, 434, 443, 445–446 alternatives, 450 major provisions, 447–450 objections, 450 Pay for performance, 281–282 free-rider problem and, 100, 282 negative side effects of, 282 principal-agent problem, 281–282 Payoff matrix, 226–227 Payroll taxes, 341, 346, 350, 351 PepsiCo, 88, 242, 379 Percentages interest rates as, 297 in price elasticity of demand, 76–77 Perfectly elastic demand, 77, 165 Perfectly inelastic demand, 77 Perfectly inelastic supply, 294 Peri, Giovanni, 463n Perri, Fabrizio, 417n mcc37735_ind_IND1-IND21.indd Page IND-14 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-14 Index Per se violations, 380 Personal consumption expenditures (C), 314–317 Personal income tax, 340–341, 345, 350, 352 Personal mandate, for health-insurance coverage, 448 Per-unit costs, 148–149 Pet, 232 Pfizer, 159, 197 Philip Morris Company, 237 Philippines, immigration from, 456 Physicians See also Health care demand for health care and, 440 supply of health care and, 444 Physician’s Health Plan of Michigan, 380 Picasso, Pablo, 280 Piece rates, 281, 282 Pixar Animation Studios, 305 Pizza Hut, 379 Plant capacity in long run, 143 in short run, 143 P MC antitrust policy and, 375 dilemma of regulation and, 211 monopolistic competition and, 221 in oligopoly, 235 as socially optimal price, 210 Policy issues See also Government pure monopoly and, 206–207 resource pricing and, 249 Political action committees (PACs), 403 Political issues in farm policy, 403–405 minimum wage, 276–277 special interests, 363, 403 Pollack, Andrew, 445n Pollution, air, 106, 110–111, 320 Polypore, 380 Population Bomb, The (Ehrlich), 314–315 Population growth birthrates and, 313–314 resource consumption per person, 314–317 single tax on land and, 296–297 trends in, 313–314 Pork-barrel politics, 366–367, 370 Positive economics, Positive externalities, 105–106 defined, 105 health care costs and, 439 Positive-sum game, 241 Post, 233 Post hoc fallacy, in economic reasoning, 17 Postrel, Virginia, 42 Poverty, 419–424 defined, 419 entitlement programs and, 421–424, 463 health care and, 423, 436, 437, 441, 449 health-insurance coverage and, 448–450 incidence of, 420 income inequality and, 410–430 measurement of, 420–421 trends in, 420–421, 428 Poverty rate, 419–421 Prante, Gerald, 352, 352n Preemption of entry, 243–244 Preexisting conditions, health insurance coverage for, 447 Preferences consumer, 119 income inequality and, 414 limited-choice, bundled-goods problem, 367–368 paradox of voting and, 363–364 Preferred provider organizations (PPOs), 446 Prescription drugs, generic drugs, gains from entry, 191 Present value calculating, 321–322 compound interest, 300–301 defined, 321 in natural resource economics, 321–322 Preset prices, 72–73 Price(s) See also Equilibrium price level; Inflation; MR MC rule; Price elasticity of demand; Price elasticity of supply agricultural, 381, 406 in cartels, 230–231 ceilings on, 61–63 change in demand and, 50–52, 53, 59–60, 69–72 change in prices of other resources, 254–255 change in supply and, 54–56, 59–60, 69–72 consumer choice and, 119–120 control over, 218 efficiency and, 98–99 equilibrium price, 56–58, 175–176, 182–184, 483 equilibrium world price, 483 floors on, 63–64 government-set, 61–64 immigration and, 465 inflexible, 230 law of demand and, 49 in marginal-revenue-marginal-cost approach to profit maximization, 176 marginal revenue versus, 198–199 in market systems, 32, 36–37 in monopolistic competition, 219–221 in oligopoly, 224, 228–229 preset, 72–73 product differentiation through, 217–218 in pure monopoly, 195, 197, 198–200, 202, 207–209 rationing function of, 58 in regulated monopoly, 209–211 of related goods, 52 relative, 49 resource, 54–55, 56 scalping and, 58 sticky, 230 in supply and demand analysis of exports and imports, 482–485 Price ceilings, 61–63, 303 black markets and, 62–63 graphical analysis, 61–62 rationing and, 58, 62 Price changes on budget line, 134 health care costs and, 439 in oligopoly, 228–229 Price discrimination, 207–209, 376, 380 conditions for, 208 defined, 207 examples of, 208 graphical analysis, 209 Price effects, of illegal immigration, 465 Price elasticity of demand, 76–84 applications of, 83 defined, 76 determinants of, 81–83 formula for, 76–77 interpretation of elasticity, 77 total-revenue test, 77–81, 200 Price elasticity of supply, 84–87 applications of, 85–87 defined, 84 long run, 85 market period, 84–85 short run, 85 Price-fixing, 380 Price floors, 63–64 additional consequences of, 64 defined, 63 effect of, 63–64 graphical analysis, 64 Price leadership defined, 233 in oligopoly, 233 Price makers, in pure monopoly, 195, 197, 199–200 Price supports criticisms of, 402–403 defined, 399 economics of agricultural, 399–400, 404–405 Price takers, pure competition and, 165, 195 Price wars, 230, 233 Pricing, resource, 249 Pricing power as barrier to entry, 195, 197 elasticity and, 86–87 in pure monopoly, 195, 197, 198–200, 202 Principal-agent problem defined, 365 pay for performance and, 281–282 representative democracy and, 365–367 Principle of comparative advantage, 477–478 See also Comparative advantage Prisoner’s dilemma, 226–227 Private bargaining, 106 mcc37735_ind_IND1-IND21.indd Page IND-15 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles Index IND-15 Private goods and services characteristics of, 99–100 demand for, 99 preferences through majority voting, 363 private goods, defined, 99 Private property land ownership, 295–296 in market systems, 30–31, 42 Procter & Gamble, 127, 234 Producer expectations, change in supply and, 55 Producer surplus, 188–189, 400–401 defined, 95 in efficiently functioning markets, 95–96 Product attributes, in monopolistic competition, 217 Product demand, elasticity of, 257 Product development See Research and development (R&D) Product differentiation defined, 217 in monopolistic competition, 217–218, 223 in oligopoly, 224 Production, exchange rates and, 505–506 Production costs, 140–160 applications and illustrations, 157–159 economic, 142–143 least-cost, 36 long-run, 152–157 in market systems, 35–36 short-run, 144–152, 175 sunk costs in decision making, 158–159 Production possibilities curve, 11–14 defined, 11–12 law of increasing opportunity costs, 12–13 sample, 12 Production possibilities model, 11–18 assumptions of, 11 economic growth and, 15–16 economics of war and, 14 future and, 16–18 international trade and, 18 law of increasing opportunity costs, 12–13 optimal allocation and, 13–14 production possibilities curve, 11–14 production possibilities table, 11 unemployment and, 14–15 Production possibilities table, 11 Productive efficiency, 203–204, 221–222 defined, 58, 97, 187–188 in oligopoly, 235 Productivity See also Economies of scale changes in, 253–254 general level of wages and, 267–268 health care prices and, 444 labor unions and, 289–291 marginal revenue product (MRP) and, 249–250 real wages and, 268 rent differences and, 295 resource demand derived from, 253–254 Product markets, 249 changes in product demand, 253 in circular flow model, 41 resource demand derived from, 253 Product variety benefits of, 223 in monopolistic competition, 222–223 Professional organizations craft union model for, 274 occupational licensing, 274, 358–359 Professional sports teams Major League Baseball, 195, 208, 273, 459 monopsony power of, 273 price discrimination and, 208 as pure monopolies, 195, 208 Profit discrimination and, 426 economic (pure), 143, 304–306 in monopolistic competition, 221 normal profit, 141, 142 resource allocation and, 307–308 start-up firms and, 459 Profit maximization in long run, 182–185 marginal-revenue-marginal-cost approach, 167–172 in monopolistic competition, 219–221 for nonrenewable natural resources, 322–324 numerical illustration, 259–260 profit-maximizing combination of resources, 258–260, 260 in pure competition, 166–176, 182–185 in pure monopoly, 200–203 in short run, 166–176 total-revenue-total cost approach, 166–167 Profit-sharing plans, 282 Progress, in market systems, 37 Progress and Poverty (George), 296–297 Progressive taxes, 340, 341, 345, 353–354 Property rights excessive present use of natural resources and, 324–325 fisheries management and, 327–329 forest management and, 326–327 in market systems, 30–31 Property taxes, 342, 346, 351, 352 Proportional taxes, 345 Proprietary income, 337 Prospect theory, 125–129 anchoring and credit card bills, 127 better consumer decisions and, 128–129 endowment effect and market transactions, 129 framing effects and advertising, 127 losses and shrinking packages, 126–127 mental accounting and overpriced warranties, 128 Protection-against-dumping argument for trade protection, 488–489 Protectionism, proponents of, 493 Protective tariffs, 485 Public assistance programs, 422, 423–424, 463 Public choice theory, 361–365 defined, 361 farm policy and, 403 government failure and, 367–368 majority voting in, 362–365 Public debt, government purchases and, 339 Public finance, 337 Public goods and services, 99–104 characteristics of, 100–101 cost-benefit analysis for, 102–104 demand for, 101–102 externalities and, 104–109 free-rider problem and, 100, 282 information failures, 358–361 marginal analysis, 101, 102–104 optimal quantity of, 101 preferences through majority voting, 363 private goods and services versus, 99–100 private goods versus, 100 public goods, defined, 100 Public interest theory of regulation, 382 Public ownership, of natural monopoly, 382 Public regulation, of natural monopoly, 381–382 Public sector See also Government circular flow model and, 337–338 defined, 336 government finance and, 338–339 government purchases, 338 income redistribution and, 349, 352–353, 413–414, 421–424 quasi-public goods and, 104 resource reallocation and, 104 Public utilities deregulation of, 383–384 as natural monopoly, 381–382 price discrimination in, 208 as regulated monopolies, 209–211 Purchasing power parity, 505 Pure capitalism, 30 Pure competition, 163–192 antitrust law and, 375 characteristics of, 164–165 defined, 164 demand in, 165–166 efficiency and, 186–189 free entry and exit in, 165, 182–184, 191 “invisible hand” and, 38, 189, 295–296 in long run, 181–192 loss-minimizing case, 171 marginal cost and short-run supply, 173–176 as market model, 164 occurrence of, 164–165 price takers in, 165, 195 profit maximization in long run, 182–185 profit maximization in short run, 166–176 purely competitive labor market, 269–271 pure monopoly versus, 195, 202 mcc37735_ind_IND1-IND21.indd Page IND-16 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-16 Index Pure competition—Cont resource demand and, 251–252 in short run, 163–179 shutdown case, 171, 172, 177 Pure monopoly, 194–213 barriers to entry, 195–197 characteristics of, 164, 195–197 defined, 164, 195 economic effects of, 203–207 examples of, 195 marginal analysis, 200–202, 204, 209, 210 monopoly demand, 197–200 objectives of study of, 195 output and price determination, 200–203, 204 price discrimination, 207–209 pricing power in, 195, 197, 198–200, 202 pure competition versus, 195, 202 regulated monopoly, 209–211 Pure profit See Economic (pure) profit Pure rate of interest, 298 Purposeful behavior, 4–5 Putin, Vladimir, 314 Pyramid, 237 Qualification information failures, 361 taxation, 350 Quality of health care, 436–437 of labor, role in wage determination, 268 of land, 296 of resources, productivity changes and, 254 Quantity change in productivity and, 253 change in quantity demanded, 53, 59–60 change in quantity supplied, 56, 59–60 equilibrium, 56–58 Quasi-public goods, 104 Quotas in fisheries management, 329 immigration, 455–456, 466, 467 import, 404, 485–488 individual transferable quotas (ITQs), 329 for legal immigrants, 455–456, 466, 467 Rate regulation, 209–211 Rates of return, technological advance and, 190 Rational behavior consumer, 119 defined, 119 Rational self-interest, purposeful behavior and, 4–5 Rationing prices and, 58, 62 usury laws and, 303 Real estate, exchange rates and, 505–506 Real GDP See Gross domestic product (GDP) Real interest rates, defined, 302 RealNetworks, 387 Real wages defined, 267 long-run trend of, 268–269 productivity and, 268 Recession See also Great Recession of 2007-2009 as obstacle to collusion, 232 Reciprocity strategies, 242–243 Recycling, 320, 352–353 Red Dog, 237 Redistribution of income, 349, 352–353 Red Wolf, 237 Regressive taxes, 345, 354 Regulation See Government regulation Relative interest rates, exchange rates and, 505 Relative price, 49 Remedies, for monopoly, 378 Remittances, 461–462 Renewable natural resources, 325–329 defined, 321 fisheries management, 327–329 forest management, 326–327 Rent economic, 294–297 land, 294–297, 367 Rent controls, 62–63 Rent-seeking behavior, 205–206, 367, 400, 403 Repeated games, 242–243 Replacement rate, 313–314 Representative democracy, principal-agent problem in, 365–367 Resale, lack of, in pure monopoly, 208 Research and development (R&D) as barrier to entry, 197, 206 gains from entry, 191 interest and, 302 oligopoly and, 234 Residual claimants, 304 Resource allocation See also Resource markets demand in See Demand for resources global, 405 marginal productivity theory of income distribution and, 260–262 profit and, 307–308 resource pricing and, 249 supply of energy in See Energy economics Resource markets See also Demand for resources; Interest; Natural resources; Profit; Rent; Supply of resources; Wage determination in circular flow model, 41 immigration and, 462 MRP MRC rule and, 250 public sector role in reallocation, 104 resource demand as derived demand, 249 resource prices and, 54–55, 56, 249 Restraints of trade, 375–376 Revenue tariffs, 485 Ricardo, David, 475 Right-to-work laws, 288 Risk See also Uncertainty of agricultural operations, 396, 398 economic (pure) profit and, 304–306 exchange-rate, 514–515 income inequality and, 414 interest-rate, 297, 301 types of, 304 uninsurable, 304–305 Rivalry private goods and, 99 private versus public goods and, 100 Rock and Roll Hall of Fame (Cleveland), 370 Rodriguez, Alex, Royal Dutch/Shell, 207 Royal Philips, 207 Royalties, 281–282 Rule of reason, 377, 378, 380 Russia command system in, 30, 39 immigration from, 458 population decline in, 314 U.S trade with, 394 SABMiller, 236–237 Saffer, Henry, 83n Sales taxes, 341, 345, 351, 352 Salmon, market for, 70–71 Samsung, 381 Samuel Adams, 237 Scale constant returns to, 156 diseconomies of, 156 economies of, 153–156, 157–159 minimum efficient, 156–157 Scalping, 58 Scarcity economic perspective and, economic resources and, 10 marginal analysis and, Schumpeter, Joseph, 190, 190n Scientific method defined, 5–6 elements of, 5–6 Sears, 234 Self-interest, in market systems, 31–32, 38 Self-selection defined, 459 immigration and, 459, 463 negative, 463 Self-sufficiency output mix, 477 Seniority, labor unions and, 288 September 11, 2001 terrorist attacks, 14 Sequential game, 243 Services private See Private goods and services product differentiation through, 217 public See Public goods and services Service Workers, 287 Sharp, 381 mcc37735_ind_IND1-IND21.indd Page IND-17 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles Index IND-17 Sherman Act of 1890, 375–376, 377, 378, 381, 386 Shortage, defined, 57–58 Short run agricultural price and income instability in, 392–394 defined, 85, 143 fixed plant in, 143 law of diminishing returns and, 144–147 price and output in monopolistic competition, 219–221 price elasticity of supply and, 85 production costs in, 144–152, 175 production relationships in, 144–147 profit maximization in pure competition, 166–176 pure competition in, 163–179 Short-run supply curve, 175 Shutdown, 171, 172, 177 Simultaneous consumption, 205 Simultaneous game, 241 Singapore, health care in, 448–449 Single seller, in pure monopoly, 195 Single-tax movement, 296–297 Size of firm, long-run production costs and, 152 Skill transferability, 459 Slope of a nonlinear curve, 25–26 Slope of a straight line, 24–25 infinite, 24–25 marginal analysis and, 24 measurement units and, 24 negative, 24 zero, 24–25 Small business See Entrepreneurs; Start-up firms Smith, Adam, 38, 124, 295–296, 475, 475n Smoot-Hawley Tariff Act of 1930, 489 Snyder’s of Hanover, 380 Social insurance programs, 421–423 Socialism See Command systems Socially optimal price dilemma of regulation and, 211 formula for, 210 Social regulation, 384–388 characteristics of, 384–385 criticisms of, 385–386 defined, 374, 384 industrial regulation versus, 384 optimal level of, 385–386 regulatory commissions, 384 support for, 385 Social Security program, 314 financing, 341, 346 payroll taxes, 350, 351 as social insurance, 421–422 Society, economizing problem of, 10–11 Sole proprietorships in business population, 41 defined, 41 Sony, 207 Sotheby’s, 381 South Korea executive pay in, 283 international trade, 474 market system in, 39 Soviet Union, former See also Russia command system in, 30, 39–40 Special interests farm policy and, 403 nature of interest groups, 363 political logrolling and, 363, 403 rent seeking and, 367 special-interest effect, 366–367 Specialization comparative advantage and, 477–478 defined, 33 division of labor and, 33 gains from, 492–494 geographic, 33 international trade, 475 labor, 154 managerial, 154–155 in market systems, 33 occupations of immigrants and, 455, 456, 459 offshoring and, 492–494 Specific excise tax, 351 Speculation in currency markets, 514–515 in determination of exchange rates, 506 Sprint, 380 Stability, flexible exchange rates and, 508 Standardization, in pure competition, 164–165 Standard Oil, 207 Standard Oil case, 377 Staples, 380 Starbucks, 157, 190 Start-up firms See also Entrepreneurs entrepreneurial ability and, 10–11 immigrants as founders of, 459 information technology, 459 life expectancy, 190 successful, 157 technological advance and, 189–192 State government employment in, 342–343 finances in U.S., 341–342 fiscal impact of immigration and, 465 health care costs and, 437 State taxes, 341–342 Statistical discrimination, 426 Status quo, 125 Sticky (inflexible) prices, in oligopoly, 230 Stock exchanges, 48 Stock market crash of 1929, 17 Stock options, 282, 283 Stocks, exchange rates and, 505–506 Strategic behavior, in oligopoly, 224 Street entertainers, 100 Strikes, 289–290 Structuralists, 377 Subsidies agricultural, 398–400, 401 change in supply and, 55, 56 for consumers, 107 in correcting for positive externalities, 107–108 criticisms of, 402–403 export, 486 as government intervention, 107–108 government provision, 107–108 for suppliers, 107, 398, 399–400 tax subsidies for health care, 441–442 Substitute goods ATMs, 261 change in demand and, 52 change in supply and, 55, 56 cross elasticity of demand and, 87–88 defined, 52 ease of resource substitutability, 257 lack of, in pure monopoly, 195 marginal rate of substitution (MRS), 135 prices of, 52 substitutability and price elasticity of demand, 81–82 Substitute resources, 462 changes in prices of other resources, 254–255 Substitution effect, 49, 122–123, 254 Sugar Program, 404–405 Sunk costs, in decision making, 158–159 Sun Microsystems, 386, 387, 459 Sunstein, Cass, 128n Superstars, 253, 416 Supplemental Nutrition Assistance Program (SNAP), 422, 423 Supplemental Security Income (SSI), 422, 423, 436, 463 Supply, 53–56 See also Market supply change in demand and, 69–72 change in quantity supplied, 56, 59–60 change in supply, 54–56, 59–60, 69–72, 175, 299 defined, 53 determinants of, 54, 56 inelastic, 294 law of supply, 53 of loanable funds, 298–299 market supply, 54 price elasticity of, 84–87 resource See Supply of resources restricting agricultural, 401 short-run, 173–176 supply curve, 53–54 Supply curve, 53–54 labor, 269–271, 278 lack of, in pure monopoly, 201–202 Supply factors, health care, 443–445 Supply-of-pounds curve, 503 Supply of resources energy economics, 314–317 environmental quality and, 330–331 mcc37735_ind_IND1-IND21.indd Page IND-18 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-18 Index Supply of resources—Cont increase in, 15–16 natural resource economics, 321–329 population growth and, 313–314 resource consumption per person, 314–317 Supply schedule, 53 Supply-side market failures, 93 Surplus balance of payments, 503 defined, 57 producer, 400–401 reduction of agricultural, 400–401 Surplus payment, land rent as, 295 Sushi, market for, 71–72 Switzerland, as magnet country for immigration, 457 TAC (total allowable catch), 329 Taco Bell, 119, 379 Taft-Hartley Act of 1947, 289 Target, 233, 242 Tariffs defined, 485 direct effects, 486–487 economic impact of, 486–487 indirect effects, 487 net costs of, 487–488 Taste-for-discrimination model, discrimination coefficient, 424–425 Tastes blindfold taste tests of beer, 236 change in demand and, 51, 52 in determination of exchange rates, 505 in market systems, 37 Taxable income, 340 Taxation apportioning tax burden, 344–346 changes in supply and, 55, 56 corporate, 341, 350–351, 352 earned-income tax credit (EITC), 422, 423–424 efficiency loss of tax, 349 elasticity of tax incidence, 347–348 excise, 83, 341, 351, 352 federal tax revenues, 340–341, 348–349 as government intervention, 107 health-insurance coverage and, 450 incidence of U.S taxes, 350–351 income distribution and, 349, 352–353, 413 interest rates and, 298 marginal tax rate, 340–341 negative externalities and, 107–108, 349–350 payroll, 341, 346, 351, 352 personal, 340–341, 345, 350, 352 progressive, 340, 341, 345, 353–354 property, 342, 346, 351, 352 proportional, 345 regressive, 345, 354 sales taxes, 341, 345, 351, 352 single tax on land, 296–297 specific taxes, 107, 351, 352 state taxes, 341–342 Tax Freedom Day (U.S.), 338 tax structure in U.S., 353–354 value-added, 346 Tax Freedom Day (U.S.), 338 Tax incidence defined, 347 division of burden, 347 elasticity and, 347–348 probable, 352 in the U.S., 350–351 Tax subsidy defined, 441 health care, 441–442 Teamsters Union, 287 Technology See also Innovation advances in, 16, 37, 189–192, 205, 206, 235, 254, 268, 395–396, 444–445 agricultural supply increases and, 395–396 changes in supply and, 55, 56 competition and, 189–192 economic growth and, 16 health care prices and, 444–445 industrial regulation in perpetuating monopoly, 382–383 in market systems, 33, 37 oligopoly and, 235 productivity changes and, 254 pure monopoly and, 205, 206 role in wage determination, 268 Temporary Assistance for Needy Families (TANF), 359, 422, 423, 436 Temporary workers, health care costs and, 437 Tennessee Valley Authority (TVA), 382 Terms of trade comparative advantage and, 478 defined, 478 flexible exchange rates and, 508 Terrorist attacks of September 11, 2001, 14 Thaler, Richard, 128n Third-party payments, health care, 439 Ticket scalping, 58 Time ease of resource substitutability, 257 income distribution over, 416–417 income inequality and, 412–413, 416–417 marginal utility and, 124–125 price elasticity of demand and, 83 price elasticity of supply and, 85 specialization and, 33 in theory of consumer behavior, 124–125 Time-value of money compound interest, 300–301 future value, 301 present value, 300–301, 321–322 Time Warner Communications, 234, 379, 383 Tobacco subsidies, 402–403 Topel, Robert, 438 Topographical maps, indifference maps and, 137 Total allowable catch (TAC), 329 Total cost (TC) average total cost (ATC), 149 defined, 148 graphical expression of, 168 in market systems, 35 ratio of resource cost to, 257 short-run production, 148 Total fertility rate, 313–314 Total output See also Gross domestic product (GDP); Output interest and, 302 Total product (TP) defined, 144 law of diminishing returns and, 144, 147 Total revenue (TR) defined, 77, 165 graphical expression of, 166, 168 in market systems, 35 price elasticity and, 81 total-revenue test for price elasticity, 77–81, 200 Total-revenue-total-cost approach, 166–167 Total utility defined, 117 income equality in maximizing, 417–418 marginal utility and, 117–119 Toyota, 207, 235, 242, 290 Trade Adjustment Assistance Act of 2002, 492 Trade barriers net costs of, 487–488 types of, 485–488 See also Import quotas; Tariffs Trade barrier wars, 489 Trade deficits causes of, 512–513 defined, 473, 500 implications of, 513 increased current consumption, 513 increased U.S indebtedness, 513 of the U.S., 512–513 Trademarks, 31 Trade-offs, budget line, 9–10 Trade surplus, 473, 500–501 Trading possibilities line, 478–479 Training See Education and training Transfer payments See also Income distribution in government finance, 338 income transfer in pure monopoly, 204 noncash transfers, 413 Treble damages, 376 Trump, Donald, Trusts, defined, 375 Truth in Lending Act of 1968, 307 Tying contracts, 376, 380–381 Tyson, 392 UCAR International, 381 Ultra Petroleum, 283 Unattainable combinations, mcc37735_ind_IND1-IND21.indd Page IND-19 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles Index IND-19 Uncertainty See also Risk flexible exchange rates and, 507–508 Underground economy See Black markets Unemployment immigration and, 462–463 income inequality and, 415 minimum wage and, 276–277 in production possibilities model, 14–15 union wage increases and, 275 Unemployment compensation, 422–423 Unemployment insurance, 422–423 Unilever, 207, 234 Uninsurable risks profit as compensation for, 305 sources of, 304–305 Unionization rate, 287 Unions See Labor unions Union shop, 288 United Autoworkers, 287 U.S Bureau of Labor Statistics, 255–256 U.S Census Bureau, 412, 456 U.S Department of Agriculture (USDA), 395–396, 401 U.S Department of Commerce, 405, 499, 500n United States dollar See Exchange rate(s) United States economy See also Federal government agriculture in, 392, 395–406 balance of payments, 499–503 capital-intensive goods, 474 capitalism in, 30 circular flow model and, 337–338 comparative advantage, 475–477 covert collusion in, 232 economics of war and, 14 energy economics in, 314–317 Environmental Performance Index (EPI), 331 executive pay in, 283, 416 export supply, 482–483 fastest-growing occupations, 256 federal finances in, 339–341 fisheries management in, 327–329 forest management in, 326–327 gasoline market in, 61–62, 71, 358 general level of wages in, 267–268 Great Depression and, 14, 17 Great Recession of 2007-2009 See Great Recession of 2007-2009 health care in, 346, 433–451 highest-paid CEOs, 283 immigration and, 454–468 impact of taxes and transfer payments in, 413 import demand, 483 imports of, 394 income distribution in, 308, 411–414, 416–417, 421–424, 428, 460–461 income shares in, 308, 460–461 international trade and, 394, 403–405, 473, 474–481 See also International trade labor unions in, 273–275, 287–291 local finances in, 342–343 as magnet for immigration, 457, 460–461 minimum wage, 276–277 monopsony in, 273 multilateral trade agreements, 490–492 North American Free Trade Agreement (NAFTA), 492 offshoring of jobs and, 492–494 opportunity-cost ratio, 476 poverty measures in, 419–421 rapidly-declining populations, 256 specialization and, 492–494 state finances in, 341–342 supply and demand analysis for international trade, 482–485 taxes in, 350–354 terrorist attacks of September 11, 2001, 14 trade adjustment assistance, 492 trade deficits, 512–513 water use in, 316, 317 wealth distribution in, 414–415, 428 U.S Environmental Protection Agency (EPA), 384 U.S Federal Communications Commission (FCC), 197, 382 U.S Federal Trade Commission (FTC), 375–376, 381 U.S Food and Drug Administration (FDA), 191, 384, 387 U.S Justice Department, 242, 375–376, 376, 381, 386–387 U.S Postal Service, 190, 192, 206, 382 U.S Steel case, 377, 381 U.S Supreme Court, antitrust policy and, 377 United Steelworkers, 287 Unit elasticity of demand, 77, 80 University of Nebraska Medical Center, 370 Unrelated goods, 52 Uruguay Round, 491 User cost of extraction, 322 in present use versus future use, 322–324 Usury laws, 303 Utility defined, 4, 117 law of diminishing marginal utility, 117–119 marginal utility See Marginal utility total utility, 117–119, 417–418 utility-maximizing rule, 120–125 Utility-maximizing rule, 120–125 algebraic generalization, 121–122 defined, 120 demand curve and, 122–123 numerical example, 120–121 Utz Quality Foods, 380 Vaccination, as positive externality, 105–106 Value-added tax (VAT), 346 Variable costs (VC) average (AVC), 149 defined, 147 short-run production, 147–148 Variables dependent, 23 independent, 23 Variety behavioral economics and, 125–126 benefits of, 223 in monopolistic competition, 222–223 Verizon, 234 Verson stamping machine, 157–158 Vertical axis, 22 Vertical intercept, 25 Vertical mergers, 379, 380 Voice mechanism, 291 Voluntary export restriction (VER), 486 Voting See Majority voting Wage(s) See also Wage determination defined, 267 efficiency, 282 general level of, 267–269 real, 268 unemployment and union wage increases, 275 Wage determination, 266–284 average wage of selected occupations, 277 bilateral monopoly model of, 275–276 CEO pay, 283, 416 definitions, 267 education and, 279, 416 general level of wages, 267–269 global perspective on wages of production workers, 267–269 immigration and, 459–460, 464–467 labor unions and, 273–275, 287–291 minimum-wage controversy in, 276–277 monopsony model of, 271–273 pay for performance, 100, 281–282 prejudice and market African-AmericanWhite wage ratio, 425–426 productivity and, 267–268 in purely competitive labor market, 269–271 wage differentials, 277–281 Wage differentials, 277–281 defined, 277 education and, 279, 416 marginal revenue productivity, 278–279 market imperfections, 280–281 noncompeting groups, 279 Wage effects, of illegal immigration, 465 Wage growth, health care costs and, 437 Wage rates defined, 267 impact of immigration on, 459–460, 465 labor unions and, 275, 280–281, 288 Walmart, 41, 190, 233, 242, 293, 308 Walt Disney Company, 234, 235, 379 War See also National defense economics of, 14 price wars, 230, 233 mcc37735_ind_IND1-IND21.indd Page IND-20 10/11/10 9:46 PM user-f494 /207/MHBR183/mcc37735_disk1of1/0077337735/mcc37735_pagefiles IND-20 Index Warranties, 361 overpriced, mental accounting and, 128 Water, use of, 316, 317 Watford, Michael, 283 Wealth, unequal distribution of, 414–415, 428 Wealth of Nations, The (Smith), 38 Wendy’s, 361 Western Union, 195 Wham-O, 195 Wheat, price floors on, 63–64 Wheeler-Lea Act of 1938, 376 Whites African-American-White wage ratio, 425–426 poverty among, 420 unionization rate, 287 Whole Foods Markets, 449 Winfrey, Oprah, 9, 410 Winner-take-all markets, 253 Women crowding model and, 427 poverty among, 420 unions and, 287 Woods, Tiger, 410 Workplace safety, 360–361 Work rules, 289 World Bank, 462n WorldCom, 380 World Health Organization (WHO), 448 World price, 482 World Trade Organization (WTO), 404–405, 491 Xerox, 197 X-inefficiency, 205, 206, 258, 382 Yahoo!, 459 Yale University, Environmental Performance Index (EPI), 330–331 YouTube, 190 Yum! Brands, 379 Zero slopes, 24–25 Zero-sum game, 241 Z visas, 466 This page intentionally left blank mcc37735_ep_book.indd Page Sec1:2 28/10/10 5:42 PM user-f494 /208/MHSF231/rob23836_disk1of1/0073523836/rob23836_pagefiles Relevant economic statistics, selected years, 1987–2009 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 2378.2 2596.2 2745.1 2810.7 2761.1 2890.2 3015.1 3255.8 3528.3 3757.6 173.0 215.3 187.6 158.1 98.7 31.4 117.9 243.5 274.5 306.6 After-tax manufacturing profits per dollar of sales (cents)* 4.9 5.9 4.9 3.9 2.4 0.8 2.8 5.4 5.6 6.0 Index of business sector productivity (1992 = 100) 90.3 91.6 92.6 94.5 96.0 100.0 110.5 101.4 101.5 104.4 0.3 1.5 1.0 2.1 1.5 4.2 0.5 0.9 0.0 2.9 Nonagricultural employees in goods-producing industries (millions) 23.5 23.9 24.0 23.7 22.6 22.1 22.2 22.8 23.2 23.4 Nonagricultural employees in service-providing industries (millions) 78.6 81.4 84.0 85.8 85.8 86.6 88.6 88.6 94.1 96.3 2735.6 2954.2 3131.3 3326.2 3438.4 3647.2 3790.6 3980.9 4178.8 4387.7 40.9 41.0 40.9 40.5 40.4 40.7 41.1 41.7 41.3 41.3 Sales by manufacturers (billions of dollars)* Profits by manufacturers (billions of dollars)* Annual change in business sector productivity (%) Compensation of employees (billions of dollars) Average weekly hours in manufacturing industries** 10 Average hourly earnings in private nonagricultural industries (dollars) 9.14 9.44 9.80 10.20 10.52 10.77 11.05 11.34 11.65 12.04 11 Average weekly earnings in private nonagricultural industries (dollars) 317.16 326.62 338.10 349.75 358.51 368.25 378.91 391.22 400.07 413.28 12 Federal minimum wage rate (dollars per hour) 3.35 3.35 3.35 3.80 4.25 4.25 4.25 4.25 4.25 4.25 13 Prime interest rate (%) 9.31 9.32 10.87 10.01 8.46 6.25 6.00 7.15 8.83 8.27 14 Ten-year Treasury bond interest rate (%) 8.39 8.85 8.49 8.55 7.86 7.01 5.87 7.09 6.57 6.44 15 Net farm income (billions of dollars) 38.0 39.6 16 Index of prices received by farmers (1990–1992 = 100) 89 99 104 104 100 98 101 100 102 112 17 Index of prices paid by farmers (1990–1992 = 100) 87 91 96 99 100 101 104 106 108 115 18 Persons below poverty level (millions) 32.2 31.7 31.5 33.6 19 Poverty rate (% of population) 46.5 46.3 40.2 35.7 50.2 38.0 46.7 39.3 52.6 38.1 39.8 36.4 58.9 36.5 13.4 13.0 12.8 13.5 14.2 14.8 15.1 14.5 13.8 13.7 20 U S goods exports (billions of dollars) 250.2 320.2 360.0 387.4 414.1 439.6 456.9 502.9 575.2 612.1 21 U.S goods imports (billions of dollars) 409.8 447.2 477.7 498.4 491.0 536.5 589.4 668.7 749.4 803.1 22 U.S Population (millions) 242.8 245.0 247.3 250.1 253.5 256.9 260.3 263.4 266.6 269.7 23 Legal immigration (thousands) 599.9 641.3 1090.2 1535.9 1826.6 973.4 903.9 804.0 720.2 915.6 24 Industry R&D expenditures (billions of dollars) 90.2 94.9 99.9 107.4 114.7 116.7 115.4 117.4 129.8 142.4 25 Price of crude oil (U.S average, dollars per barrel) 15.40 12.58 15.86 20.03 16.54 *Revised definition for this series beginning in 1973 **Includes overtime ***Data for 2009 and the immediate prior years are subject to change because of subsequent government data revisions 15.99 14.25 13.92 14.62 18.46 mcc37735_inside-covers.indd Page 28/10/10 5:43 PM user-f494 /208/MHSF231/rob23836_disk1of1/0073523836/rob23836_pagefiles Relevant economic statistics, selected years, 1947–1986 1947 1949 1951 1953 1955 1957 1959 1961 1963 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*** Sales by manufacturers (billions of dollars)* — — — 265.9 278.4 320.0 338.0 356.4 42.7 3920.0 3949.4 4189.9 4548.2 4295.0 4216.4 4397.2 4934.1 5411.5 5782.7 6060.0 6375.6 5051.6 Profits by manufacturers (billions of dollars)* — — — 24.4 28.6 28.2 29.7 27.5 34.9 331.4 314.7 355.3 381.1 83.2 195.5 305.7 447.5 524.2 604.6 602.8 388.1 330.0 After-tax manufacturing profits per dollar of sales (cents)* 6.7 6.4 4.9 4.3 5.4 4.8 4.8 4.3 4.7 6.2 5.9 6.2 6.1 0.8 3.2 5.4 7.1 7.4 8.1 7.3 4.2 4.9 Index of business sector productivity (1992 = 100) 32.2 34.5 38.5 41.0 43.6 45.0 48.0 50.8 55.2 106.3 109.4 113.3 117.2 120.7 126.2 131.0 134.9 137.1 138.5 141.0 144.0 149.4 Annual change in business sector productivity (%) — 2.3 3.2 3.6 4.1 3.2 3.8 3.5 3.9 1.8 3.0 3.5 3.5 3.0 4.5 3.8 2.9 1.7 1.0 1.8 2.1 3.8 Nonagricultural employees in goods-producing industries (millions) 17.3 16.5 18.7 19.7 19.2 19.6 19.2 18.6 19.4 23.9 24.4 24.5 24.6 23.9 22.6 21.8 21.9 22.2 22.5 22.2 21.3 18.6 Nonagricultural employees in 26.6 27.4 29.2 30.6 31.5 33.3 34.2 35.5 37.4 98.9 101.6 104.5 107.1 108.0 107.8 108.2 109.6 111.5 113.6 115.4 115.5 112.3 130.1 141.9 181.4 210.3 225.7 257.5 281.0 305.3 345.2 4668.6 5023.9 5348.8 5788.8 5979.3 6110.8 6367.6 6708.4 7060.0 7475.7 7862.7 8042.4 7786.6 — — — — — — 40.3 39.9 40.6 41.7 41.4 41.4 41.3 40.3 40.5 40.4 40.8 40.7 41.1 41.2 40.8 39.8 10 Average hourly earnings in private nonagricultural industries (dollars) — — — — — — — — — 12.51 13.01 13.49 14.02 14.54 14.97 15.37 15.69 16.13 16.76 17.43 18.08 18.60 11 Average weekly earnings in private nonagricultural industries (dollars) — — — — — — — — — 431.86 448.56 463.15 481.01 493.79 506.75 518.06 529.09 544.33 567.87 590.04 607.99 616.37 4.75 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.85 6.55 7.25 service-providing industries (millions) Compensation of employees (billions of dollars) Average weekly hours in manufacturing industries** 12 Federal minimum wage rate (dollars per hour) 0.75 13 Prime interest rate (%) 1.63 0.75 2.00 0.75 2.56 14 Ten-year Treasury bond interest rate (%) — — — 0.75 0.75 1.00 1.00 1.15 1.25 3.17 3.16 4.20 4.48 4.50 4.50 8.44 8.35 8.00 9.23 6.91 4.67 4.12 4.34 6.19 7.96 8.05 5.09 3.25 2.85 2.82 3.65 4.33 3.88 4.00 6.35 5.26 5.65 6.03 5.02 4.61 4.01 4.27 4.29 4.80 4.63 3.66 3.26 15 Net farm income (billions of dollars) 15.4 12.8 15.9 13.0 11.3 11.1 10.7 12.0 11.8 47.7 50.7 16 Index of prices received by farmers (1990–1992 = 100) — — — — — — — — — 107 51.3 102 96 96 102 98 106 118 114 115 136 149 131 17 Index of prices paid by farmers (1990–1992 = 100) — — — — — — — — — 118 115 115 119 123 124 128 134 142 150 161 183 179 18 Persons below poverty level (millions) — — — — — — 39.5 39.6 36.4 35.6 47.1 34.5 32.8 31.6 54.9 32.9 39.1 34.6 60.9 35.9 87.3 37.0 78.7 37.0 58.5 34.5 70.9 87.1 37.3 39.8 57.0 43.6 19 Poverty rate (% of population) — — — — — — 22.4 21.9 19.5 13.3 12.7 11.8 11.3 11.7 12.1 12.5 12.7 12.6 12.3 12.5 13.2 14.3 20 U S goods exports (billions of dollars) 16.1 12.2 14.2 12.4 14.4 19.6 16.5 20.1 22.3 678.4 670.4 684.0 772.0 718.7 685.2 715.8 806.2 892.3 1015.8 1138.4 1277.0 1045.5 21 U.S goods imports (billions of dollars) 6.0 6.9 11.2 11.0 11.5 13.3 15.3 14.5 17.0 877.0 918.6 1031.8 1226.7 1148.6 1168.0 1264.9 1478.0 1683.2 1863.1 1969.4 2117.2 1562.6 22 U.S population (millions) 144.1 149.2 154.9 160.2 165.9 172.0 177.8 183.7 189.2 272.9 276.1 279.3 282.4 285.3 288.0 290.7 293.3 296.0 298.8 301.7 304.5 307.2 23 Legal immigration (thousands) 147.3 188.3 205.7 170.4 237.8 326.9 260.9 271.3 306.3 797.8 653.2 644.8 841.0 1058.9 1059.4 703.5 957.9 1122.4 1266.3 1130.8 1107.1 1052.4 — — — 3.6 4.5 7.3 9.2 10.3 12.2 155.4 167.1 182.1 200.0 202.0 193.9 200.7 208.3 226.0 241.8 269.3 233.9 — 2.68 2.77 3.09 2.90 24 Industry R&D expenditures (billions of dollars) 25 Price of crude oil (U.S average, dollar per barrel) *Revised definition for this series beginning in 1973 **Includes overtime 1.93 2.54 2.53 2.89 2.89 17.23 10.87 15.56 26.72 21.84 22.51 27.56 36.77 50.28 59.69 66.52 Sources: Economic Report of the President, 2010; Bureau of Economic Analysis; Bureau of Labor Statistic; National Science Foundation; Federal Reserve System; and U.S Energy Information Administration 94.04 56.39 mcc37735_inside-covers.indd Page 28/10/10 5:43 PM user-f494 /208/MHSF231/rob23836_disk1of1/0073523836/rob23836_pagefiles Relevant economic statistics, selected years, 1947–1986 1947 1949 1951 1953 1955 1957 1959 1961 1963 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*** Sales by manufacturers (billions of dollars)* — — — 265.9 278.4 320.0 338.0 356.4 42.7 3920.0 3949.4 4189.9 4548.2 4295.0 4216.4 4397.2 4934.1 5411.5 5782.7 6060.0 6375.6 5051.6 Profits by manufacturers (billions of dollars)* — — — 24.4 28.6 28.2 29.7 27.5 34.9 331.4 314.7 355.3 381.1 83.2 195.5 305.7 447.5 524.2 604.6 602.8 388.1 330.0 After-tax manufacturing profits per dollar of sales (cents)* 6.7 6.4 4.9 4.3 5.4 4.8 4.8 4.3 4.7 6.2 5.9 6.2 6.1 0.8 3.2 5.4 7.1 7.4 8.1 7.3 4.2 4.9 Index of business sector productivity (1992 = 100) 32.2 34.5 38.5 41.0 43.6 45.0 48.0 50.8 55.2 106.3 109.4 113.3 117.2 120.7 126.2 131.0 134.9 137.1 138.5 141.0 144.0 149.4 Annual change in business sector productivity (%) — 2.3 3.2 3.6 4.1 3.2 3.8 3.5 3.9 1.8 3.0 3.5 3.5 3.0 4.5 3.8 2.9 1.7 1.0 1.8 2.1 3.8 Nonagricultural employees in goods-producing industries (millions) 17.3 16.5 18.7 19.7 19.2 19.6 19.2 18.6 19.4 23.9 24.4 24.5 24.6 23.9 22.6 21.8 21.9 22.2 22.5 22.2 21.3 18.6 Nonagricultural employees in 26.6 27.4 29.2 30.6 31.5 33.3 34.2 35.5 37.4 98.9 101.6 104.5 107.1 108.0 107.8 108.2 109.6 111.5 113.6 115.4 115.5 112.3 130.1 141.9 181.4 210.3 225.7 257.5 281.0 305.3 345.2 4668.6 5023.9 5348.8 5788.8 5979.3 6110.8 6367.6 6708.4 7060.0 7475.7 7862.7 8042.4 7786.6 — — — — — — 40.3 39.9 40.6 41.7 41.4 41.4 41.3 40.3 40.5 40.4 40.8 40.7 41.1 41.2 40.8 39.8 10 Average hourly earnings in private nonagricultural industries (dollars) — — — — — — — — — 12.51 13.01 13.49 14.02 14.54 14.97 15.37 15.69 16.13 16.76 17.43 18.08 18.60 11 Average weekly earnings in private nonagricultural industries (dollars) — — — — — — — — — 431.86 448.56 463.15 481.01 493.79 506.75 518.06 529.09 544.33 567.87 590.04 607.99 616.37 4.75 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.15 5.85 6.55 7.25 service-providing industries (millions) Compensation of employees (billions of dollars) Average weekly hours in manufacturing industries** 12 Federal minimum wage rate (dollars per hour) 0.75 13 Prime interest rate (%) 1.63 0.75 2.00 0.75 2.56 14 Ten-year Treasury bond interest rate (%) — — — 0.75 0.75 1.00 1.00 1.15 1.25 3.17 3.16 4.20 4.48 4.50 4.50 8.44 8.35 8.00 9.23 6.91 4.67 4.12 4.34 6.19 7.96 8.05 5.09 3.25 2.85 2.82 3.65 4.33 3.88 4.00 6.35 5.26 5.65 6.03 5.02 4.61 4.01 4.27 4.29 4.80 4.63 3.66 3.26 15 Net farm income (billions of dollars) 15.4 12.8 15.9 13.0 11.3 11.1 10.7 12.0 11.8 47.7 50.7 16 Index of prices received by farmers (1990–1992 = 100) — — — — — — — — — 107 51.3 102 96 96 102 98 106 118 114 115 136 149 131 17 Index of prices paid by farmers (1990–1992 = 100) — — — — — — — — — 118 115 115 119 123 124 128 134 142 150 161 183 179 18 Persons below poverty level (millions) — — — — — — 39.5 39.6 36.4 35.6 47.1 34.5 32.8 31.6 54.9 32.9 39.1 34.6 60.9 35.9 87.3 37.0 78.7 37.0 58.5 34.5 70.9 87.1 37.3 39.8 57.0 43.6 19 Poverty rate (% of population) — — — — — — 22.4 21.9 19.5 13.3 12.7 11.8 11.3 11.7 12.1 12.5 12.7 12.6 12.3 12.5 13.2 14.3 20 U S goods exports (billions of dollars) 16.1 12.2 14.2 12.4 14.4 19.6 16.5 20.1 22.3 678.4 670.4 684.0 772.0 718.7 685.2 715.8 806.2 892.3 1015.8 1138.4 1277.0 1045.5 21 U.S goods imports (billions of dollars) 6.0 6.9 11.2 11.0 11.5 13.3 15.3 14.5 17.0 877.0 918.6 1031.8 1226.7 1148.6 1168.0 1264.9 1478.0 1683.2 1863.1 1969.4 2117.2 1562.6 22 U.S population (millions) 144.1 149.2 154.9 160.2 165.9 172.0 177.8 183.7 189.2 272.9 276.1 279.3 282.4 285.3 288.0 290.7 293.3 296.0 298.8 301.7 304.5 307.2 23 Legal immigration (thousands) 147.3 188.3 205.7 170.4 237.8 326.9 260.9 271.3 306.3 797.8 653.2 644.8 841.0 1058.9 1059.4 703.5 957.9 1122.4 1266.3 1130.8 1107.1 1052.4 — — — 3.6 4.5 7.3 9.2 10.3 12.2 155.4 167.1 182.1 200.0 202.0 193.9 200.7 208.3 226.0 241.8 269.3 233.9 — 2.68 2.77 3.09 2.90 24 Industry R&D expenditures (billions of dollars) 25 Price of crude oil (U.S average, dollar per barrel) *Revised definition for this series beginning in 1973 **Includes overtime 1.93 2.54 2.53 2.89 2.89 17.23 10.87 15.56 26.72 21.84 22.51 27.56 36.77 50.28 59.69 66.52 Sources: Economic Report of the President, 2010; Bureau of Economic Analysis; Bureau of Labor Statistic; National Science Foundation; Federal Reserve System; and U.S Energy Information Administration 94.04 56.39 ... feeders and offbearers Paper goods machine setters operators, tenders Computer operators Percentage Increase* 20 08 20 18 35 21 2 180 56 24 6 21 141 125 41 1 82 240.7 23 3.7 23 0.3 22 6.7 22 6.1 51 21 2 39... specialists Biochemists and biophysicists Athletic trainers Percentage Increase* 20 08 20 18 16 28 72. 0 29 2 922 817 27 448 1383 1193 38 53.4 50.0 46.0 41 .2 109 75 39 23 16 154 104 54 32 22 40.4 39.0 37.9... wages And some workers, through labor unions, 26 1 mcc11447_ch 12_ 247 -26 5.indd Page 26 2 26 2 12/ 09/10 7 :21 AM user-f501 20 7/MHRL043/kno31619_disk1of1/0070131619/kno31619_pagefiles: PART FOUR Microeconomics